Astrotech - 10-Q quarterly report FY

 

(Mark One)

(Exact name of registrant as specified in this charter)

401 Congress Avenue, Suite 1650
Austin, Texas 78701
(Address of principal executive offices and zip code)

(512) 485-9530
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

As of November 9, 2009 there were 16,551,164 shares of the registrant’s common stock outstanding.

 

 

As used in this Form 10-Q, the abbreviations and acronyms contained herein have the meanings set forth below. Additionally, the terms “Astrotech”, “the Company”, “we”, “us” and “our” refer to Astrotech Corporation and its subsidiaries, unless the context clearly indicates otherwise.

ASTROTECH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

ASTROTECH CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

ASTROTECH CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

Astrotech Corporation (Nasdaq: ASTC) (“Astrotech”, “the Company”, “we”, “us” or “our”) is a commercial aerospace company that provides spacecraft payload processing and government services, designs and manufactures space hardware, and commercializes space technologies for use on Earth.

Astrotech has experience supporting both manned and unmanned missions to space with product and service support including space hardware design and manufacturing, research and logistics expertise, engineering and support services, and payload processing and integration. Through new business initiatives such as 1st Detect, Astrogenetix, and AirWard, Astrotech continues to pave the way in the commercialization of space by translating space-based technology into terrestrial applications.

Astrotech Space Operations, Inc. (“ASO”) – ASO is the leading commercial supplier of satellite launch processing services in the United States. ASO provides processing support for government and commercial customers with their complex communication, Earth observation and deep space satellites. ASO’s spacecraft processing facilities are among the elite in the industry, with more than 300,000 square feet of space that can support the largest, five-meter class satellites. ASO has provided launch processing support for government and commercial customers for nearly a quarter century, successfully processing more than 270 spacecraft. ASO’s exclusive, turn-key approach to the total satellite life cycle leverages the Company’s legacy in ground processing operations, and engineering and support services. By offering the satellite customer mission design and planning, ground and launch operations, and mission operations and end-user enhancement, ASO ensures End-to-End Mission Assurance for its customers. This includes assistance with mission design, regulatory planning, preliminary engineering and more detailed systems, mechanical, software, electrical, and optical engineering services.

Other – Our Other business unit is an incubator envisioned to commercialize space-industry technologies into real-world applications to be sold to consumers and industry. The Other business unit has developed three business initiatives to date; 1st Detect, Astrogenetix and AirWard. 1st Detect Corporation began under a Space Act Agreement with NASA for a chemical detection unit to be used on the ISS. 1st Detect engineers have developed a Miniature Chemical Detector, a breakthrough device in the mass spectrometer market that fills a niche by being highly accurate, lightweight, battery-powered, durable and inexpensive. Astrogenetix, Incorporated is the first commercial biotechnology company to use the unique environment of space to develop novel therapeutic products. A natural extension of the many years of experience preparing, launching, and operating over 1,500 science payloads in space, Astrogenetix is in the process of developing products from microgravity discoveries. AirWard Corporation has designed and manufactured shipping containers to transport oxygen bottles and oxygen generators for commercial aircraft as a solution to the U.S. Department of Transportation’s mandate stipulating that U.S. airlines must adhere to stringent containment requirements to protect these potentially volatile payloads from flame, heat and impact during flight.

As of September 30, 2009, we had cash and cash equivalents of $2.7 million and our working capital was approximately $9.3 million. As of September 30, 2008 we had cash and restricted cash-on-hand of $13.1 million and our working capital was approximately $2.2 million. During the first quarter of fiscal year 2009, cash was designated as restricted by the Board of Directors for use in the construction of our payload processing facility at VAFB; however the Board of Directors deemed this self-imposed classification no longer necessary due to a majority of the construction for our payload processing facility at VAFB complete in the fourth quarter of fiscal year 2009.

In February 2008 (see Note 5), we consummated a financing facility with a commercial bank. This facility provides for a three year $4.0 million term loan, payable in monthly installments of principal and interest and a $2.0 million revolving credit facility. At September 30, 2009, $1.0 million was outstanding under the revolving credit facility.

We believe we have sufficient liquidity and backlog to fund ongoing operations for at least the next fiscal year. We expect to utilize existing cash and proceeds from operations to grow our core business offering in ASO and to support strategies for new business initiatives.

In the opinion of Astrotech management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company’s interim financial statements.

The results of operations for the three month period ended September 30, 2009 are not necessarily indicative of full year results. Our results of operations typically fluctuate significantly from quarter to quarter. The interim unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our 2009 Annual Report on Form 10-K, as amended (the “2009 10-K”). We have evaluated all subsequent events through November 12, 2009, the date the financial statements were issued.

Certain amounts reported in previous periods have been reclassified to conform to the current period presentation.

Basic net income per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and the if-converted method. Dilutive potential common shares include outstanding stock options, convertible debt, and shared-based awards. The reconciliation and the components of basic and diluted net income per share are as follows (in thousands, except per share data):

The senior convertible notes payable outstanding as of September 30, 2009 and September 30, 2008, which are convertible into 340,904 and 457,629 shares of common stock, respectively, at $15.00 per share, have not been included in the computation of diluted net income per share for the three months ended September 30, 2009 and 2008, respectively, as the impact to net income per share is anti-dilutive.

Options to purchase 50,400 and 900,608 shares of common stock at exercise prices ranging from $4.40 to $48.75 per share outstanding for the three months ended September 30, 2009 and 2008, respectively, were not included in diluted net income per share, as the impact to net income per share is anti-dilutive.

Astrotech recognizes revenue employing several generally accepted revenue recognition methodologies across its business units. The methodology used is based on contract type and the manner in which products and services are provided.

Revenue generated by Astrotech’s payload processing facilities is recognized ratably over the occupancy period of the satellite while in the Astrotech facilities. For the multi-year guaranteed-mission contract with ULA, revenue is billed and recognized on a quarterly basis. The percentage-of-completion method is used for all contracts where incurred costs can be reasonably estimated and successful completion can be reasonably assured at inception. Changes in estimated costs to complete and provisions for contract losses are recognized in the period they become known. Revenue for shipments of commercial products is recognized at shipment.

Under certain contracts, we make expenditures for specific enhancements and/or additions to our facilities where the customer agrees to pay a fixed fee to deliver the enhancement or addition. We account for such agreements as a reduction in the cost of such investments and recognize any excess of amounts collected above the expenditure as revenue. Revenue for ASO recognized under a building modification contract with a government agency (see Note 13) is accounted for under the percentage-of-completion method based on costs incurred over the period of the agreement.

In February 2008, we entered into a financing facility with a bank providing a $4.0 million term loan terminating February 2011 and a $2.0 million revolving credit facility terminating in February 2010. The term loan requires monthly payments of principal plus interest at the rate of prime plus 1.75%, and the revolving credit facility incurs interest at the rate of prime plus 0.75%. The bank financing facilities are secured by the assets of ASO, including accounts receivable, and require us to comply with designated covenants. The balance of the $4.0 million term loan at September 30, 2009 was $3.5 million. At September 30, 2009, $1.0 million was outstanding under the revolving credit facility.

At September 30, 2009, Astrotech had $5.1 million of senior convertible notes outstanding which mature on October 15, 2010 and pay interest semi-annually on April 15 and October 15.

In general, fair values utilize quoted prices in active (when available) markets for identical assets or liabilities. The following table presents the carrying amounts and estimated fair values of certain of the Company’s financial instruments as of September 30, 2009 and 2008, (in thousands):

The fair value of our long-term debt is estimated based on the current rates offered for similar financial instruments. The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, and accounts payable approximate their fair market value due to the relatively short duration of these instruments.

In April 2009, the FASB issued guidance changing fair value accounting. This pronouncement requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and requires those disclosures in summarized financial information in interim financial statements. We adopted this guidance on July 1, 2009 and the adoption of these changes had no impact on the consolidated financial statements.

A substantial portion of our revenue has been generated under contracts with the U.S. Government. During the quarters ended September 30, 2009 and 2008, approximately 71% and 27%, respectively, of our revenues were generated under U.S. Government contracts. Accounts receivable totaled $15.5 million at September 30, 2009, of which, 83% is attributed to the U.S. Government.

The Company maintains funds in bank accounts that may exceed the limit insured by the Federal Deposit Insurance Corporation, or “FDIC.” In October 2008, the FDIC increased its insurance to $250,000 per depositor, and to an unlimited amount for non-interest bearing accounts. The risk of loss attributable to these uninsured balances is mitigated by depositing funds in what we believe to be high credit quality financial institutions. The Company has not experienced any losses in such accounts.

Management’s primary financial and operating reviews focus on ASO, the core business unit. All intercompany transactions between business units have been eliminated in consolidation. Key financial metrics are as follows:

As of September 30, 2009, 444,035 shares of Common Stock were reserved for future grants under the 2008 Plan. In the three months ended September 30, 2009 and 2008, we recognized compensation expense of $0.1 million and $1.0 million, respectively for restricted stock and stock options outstanding. Included in the 2008 compensation expense is the grant of unrestricted shares to named executive officers and directors in July 2008.

In the first quarter of fiscal 2010, the Compensation Committee of the Board of Directors granted directors, named executive officers and employees 1,995,559 of restricted shares in recognition of the positive fiscal 2009 financial and operating performance. The shares were issued from the 2008 Stock Incentive Plan, vest 33.33% a year over a three year period and expire upon employee termination.

In December 2007, we issued 239,900 performance shares that vest in February 2011, subject to certain events or upon designation by the Compensation Committee. Termination of employment for any cause is an event of forfeiture. The 2007 performance shares were valued at the close of business on the grant date. We recognize expense and accrue an incentive compensation liability pro rata over the vesting period. Since inception, 167,500 shares have been forfeited. An expense was incurred in the amount of $0.1 million for the three months ended September 30, 2009.

In December 2007, the Compensation Committee of the Board of Directors adopted a Long Term Cash Incentive Plan. The plan makes cash incentive awards to employees based on the successful completion of certain events and passage of time, as established by the Compensation Committee. These units vest on February 15, 2011 and are subject to material risk of forfeiture. The Compensation Committee granted such awards to employees valued at $0.3 million. As of September 30, 2009, the Company had a remaining commitment for such awards of $0.1 million. We have accrued $0.1 million towards this future commitment.

The fair value of each option award is estimated on the date of grant using the Black Scholes option pricing model, which determines inputs as shown in the following table.

No options were issued for the three months ended September 30, 2009.

A summary of our stock option activity as of September 30, 2009, and changes during the first three months of fiscal year 2010, are presented in the following table:

The intrinsic value for stock options is defined as the difference between the current market value and the grant price.

There were no options granted during the first three months of fiscal 2010. Compensation costs recognized related to vested stock option awards during the three months ended September 30, 2009 was $0.01 million. At September 30, 2009, there was $0.2 million of total unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a weighted-average period of 3.7 years.

In August 2009, the Board of Directors granted 525,000 total restricted shares valued at $0.6 million to directors from the 2008 Stock Incentive Plan. The restricted shares vest 33.33% a year for three years and expire upon termination. Compensation expense of $0.02 million was recorded in the quarter ended September 30, 2009 for these awards.

In July 2009, the Board of Directors approved the adoption of the Astrotech Shareholder’s Rights Plan and the Company subsequently filed registration Form 8-A with the SEC.

On September 30, 2009 R. Scott Nieboer resigned from the Astrotech Board of Directors and the Audit Committee of the Board of Directors. Mr. Nieboer’s decision to resign is not a result of a disagreement with the Company related to the Company’s operations, policies or practices. In October 2009, the Board of Directors appointed current director Sha-Chelle Manning to fill the vacancy on the Audit Committee.

In December 2008, the Company entered into a seven month, auto-renewable lease agreement with Mr. Royston, President of Astrotech, to lease a house located in Melbourne, Florida to be used by employees of the Company while conducting business on behalf of the Company. The lease provides for monthly rental payments of $2,900 to Mr. Royston with expenses of utilities and consumables to be paid by the Company. The lease was terminated by the Company in September 2009 and subsequently, reinstated during October 2009.

On June 3, 2009, the FASB approved the “FASB Accounting Standards Codification”, or the Codification, as the single source of authoritative nongovernmental Generally Accepted Accounting Principles, or GAAP, in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification is considered non-authoritative. The adoption of the Codification did not have an impact on the Company’s financial position or results of operations.

In September 2009, the construction of our payload processing facility at VAFB was complete and the Company billed the U.S. Government for the completion milestone under the contract. In October 2009, Astrotech recorded the cash receipt for the final milestone from the U.S. Government. Given the completion of the facility within customer deadlines, the Company no longer has a contractual contingency and no longer holds restricted cash related to this contract.

In May 2008, the Company received a letter from ARES notifying us of ARES’s intent to terminate the Cost Plus Award Fee Subcontract No. SGS-0311403.00. The provision referred to in ARES’s correspondence provides for termination for “convenience.” The Company has consistently received excellent reviews for its performance under the Subcontract and has earned near maximum award fees. Previously, 45 employees of the Company were engaged under the Subcontract, which resulted in no revenue for the current fiscal quarter.

The Company and ARES have not resolved certain issues relative to the early termination of the Subcontract, including, but not limited to, a receivable from ARES under this contract totaling $1.5 million. The Company is evaluating its contractual rights and other options with respect to ARES’s claimed termination of the Subcontract, including ARES’s obligations with respect to such claimed termination.

Common stock or senior convertible notes payable repurchases under the Company’s securities repurchase program may be made from time-to-time, in the open market, through block trades or otherwise in accordance with applicable regulations of the SEC. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice. Additionally, the timing of such transactions will depend on other corporate strategies and will be at the discretion of the management of the Company.

In March 2009, the Company repurchased 300,000 shares of Common Stock at a price of $0.40 per share, pursuant to the securities repurchase program. As of September 30, 2009, we had repurchased 311,660 share of common stock at a cost of $0.2 million, which represents an average cost of $0.76 per share, and $1.1 million of senior convertible notes payable (See Note 5). As a result, the Company is authorized to repurchase an additional $5.7 million of securities under this program.

On October 31, 2008, the Company purchased $1,750,000 principal amount of its outstanding 5.5% convertible notes due October 2010 from Curtiswood Capital LLC. Mr. R. Scott Nieboer, a director of the Company until his resignation on September 30, 2009, was a beneficial owner of the repurchased securities. The repurchased notes were acquired at an established market price on the day of trade and will be retired by the Company. The Company recognized a gain of $0.7 million on the transaction in the three months ended December 31, 2008.

In September 2009, the Company announced that the Board of Directors has engaged investment banking firm Lazard Ltd. to advise the Company in exploring strategic financial and business alternatives to enhance shareholder value. The range of alternatives which may be considered could include strategic acquisitions, a sale of some or all of the company’s assets or a variety of other possible transactions. There can be no assurance regarding the timing of or whether the Company will elect to pursue any of the strategic alternatives it may consider, or that any such alternatives will result in changes to the Company’s plans or will be consummated.

In October 2009, the $1.0 million draw on the revolving credit line was repaid in full. At the time of filing, there was no outstanding balance on the revolving credit line.

In October 2009, the Board of Directors appointed current director Sha-Chelle Manning as a member of the Audit Committee of the Board of Directors. Ms. Manning filled a vacancy created by R. Scott Nieboer’s resignation on September 30, 2009.

Astrotech was formed in 1984 to leverage the environment of space for commercial purposes. For the last 25 years, the Company has remained a crucial player in space commerce activities. We have supported the launch of 23 shuttle missions and more than 270 spacecraft, building space hardware and processing facilities, and preparing and processing scientific research for microgravity.

We offer products and services in the following areas:

Revenue. Total revenue increased to $7.8 million for the three months ended September 30, 2009, from $6.0 million for the comparable period in 2009. The increase was primarily attributable to an increased launch schedule at ASO and additional revenue associated with the completion of the construction for our payload processing facility at VAFB.

Gross Profit. Gross profit increased to $4.8 million for the three months ended September 30, 2009, as compared to $2.5 million for the three months ended September 30, 2008. The gross margin increased to 62% for the three months ended September 30, 2009, up from 41% for the three months ended September 30, 2008. The increase in gross profit was primarily attributable to an increase in overall payload processing volume and the mix of revenue shifting to more profitable fixed-price satellite payload processing.

Selling, General and Administrative Expense. Selling, general and administrative expense increased to $3.1 million for the three months ended September 30, 2009, as compared to $1.7 million for the three months ended September 30, 2008. As a percentage of revenue, selling, general and administrative expenses increased to 40% in 2009 as compared to 28% in 2008. The increase was primarily attributable to external consulting relating to engineering proposal services and legal fees, partially offset by a reduction in headcount.

Research and Development Expense. Research and development expense increased to $0.7 million for the three months ended September 30, 2009 as compared to $0.6 million for the three months ended September 30, 2008. As a percentage of revenue, research and development expense decreased to 9% in 2009 as compared with 10% in 2008. The relatively consistent expense was a focused effort to incur efficient investment in the mini-mass spectrometer and the Astrogenetix microgravity processing platform.

Interest and Other expense, net. Interest and other expense, net, increased to $0.3 million for the three months ended September 30, 2009 as compared to $0.1 million for the three months ended September 30, 2008. Interest Expense for 2009 relates to interest on the senior convertible note and the term note, offset by interest income mainly from our money market. Also included in other expense for the three months ended September 30, 2009 is the write-off of $0.2 million of aerospace metals.

As of September 30, 2009, we had cash and cash equivalents of $2.7 million and our working capital was approximately $9.3 million. As of September 30, 2008 we had cash and restricted cash-on-hand of $13.1 million and our working capital was approximately $2.2 million. The following is a summary of the change in our cash and cash equivalents for the three months ended September 30:

Cash used in operations for the three months ended September 30, 2009 was $2.3 million as compared with cash used in operations of $0.9 million for the three months ended September 30, 2008. Significant items affecting operating cash flows for the three months ended September 30, 2009 were net income of $0.8 million, depreciation and amortization of $0.5 million and stock based compensation expense of $0.1 million. At September 30, 2008, operating cash flow included net income of $0.1 million and depreciation and amortization of $0.6 million.

Changes in assets and liabilities affecting our operating cash flows for the three months ended September 30, 2009 are as follows:

Assets. Accounts receivable increased $3.3 million during the three months ended September 30, 2009. The primary driver for the increase was that the Company billed the final invoice for the remaining portion of milestone payments associated with the completion of the construction for our payload processing facility at VAFB.

Liabilities. Advances on the construction contract increased by $2.3 million in the three months ended September 30, 2009. The increase in advances on the construction contract was primarily due to the completion of construction for the facility at VAFB. The Company billed the final invoice for the remaining portion of milestone payments associated with the completion.

Accounts payable decreased by $2.1 million primarily due to payments to subcontractors for work performed for our payload processing facility at VAFB during the period.

Deferred revenue decreased $0.5 million in the three months ended September 30, 2009. Deferred revenue represents amounts collected from customers for projects, products, or services expected to be provided at a future date. The change is a result of a timing difference between cash collections on payload processing customer contracts and amounts earned as revenue.

In the three months ended September 30, 2009, net cash used in investing activities was $0.7 million as compared to $0.1 million in the three months ended September 30, 2008. The $0.7 million use of cash in the three months ended September 30, 2009, was attributable to $0.6 million in capital improvements and $0.1 in improvements for the payload processing facilities. In the three months ended September 30, 2008, the $0.1 million use of cash was driven by the purchase of leasehold improvements.

Cash used in financing activities for the three months ended September 30, 2009, was $1.0 million as compared with cash provided by financing activities of $0.9 million for the three months ended September 30, 2008. During the three months ended September 30, 2009, the revolver was drawn down $1.0 million in order to meet short-term liquidity requirements.

We do not have any significant off-balance sheet arrangements, other than operating leases, that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We have no material changes to the disclosure made on this matter in our 2009 10-K.

Currently, the Company is not a party to any material pending legal proceedings, which in management’s opinion, would have a material adverse effect on our business, financial condition, or results of operation.

There have been no material changes in the risk factors described in our 2009 10-K.

During the quarter ended September 30, 2009, we did not issue any unregistered securities or repurchase any of our securities.

During the quarter ended September 30, 2009, we did not have any defaults upon our senior securities.

During the quarter ended September 30, 2009, we did not submit any matters to a vote of security holders.

Not applicable.

The following exhibits are filed herewith:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.